Companies (Auditor s Report) Order, 2016 CA T.V.Ganesh 1
CARO 2016 notified Applicable for all financial years beginning on or after April 1, Does not apply to consolidated financial statements Changes in threshold limits for companies not covered by the order 9 new clauses added, 4 clauses of CARO deleted in addition to changes to some of the clauses of CARO. 2
Every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013 (18 of 2013) [hereinafter referred to as the Companies Act) except (i) a Banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); (ii) an insurance company as defined under the Insurance Act 1938 (4 of 1938); (iii) a company licensed to operate under section 8 of the Companies Act; and (iv) a One Person Company as defined under clause (62) of section 2 of the Companies Act and a Small Company as defined under clause (85) of section 2 of the Companies Act; and (v) a private limited company, not being a subsidiary or holding company of a public company, having a paid up capital and reserves and surplus not more than rupees one crore as on the balance sheet date and which does not have total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year and which does not have a total revenue as disclosed in Scheduled III to the Companies Act, 2013 (including revenue from discontinuing operations) exceeding rupees ten crore during the financial year as per the financial statements. CARO Exemption given to all private limited companies with paid up capital and reserves of not more than Rupees fifty lakhs and which does have a loan outstanding exceeding rupees twenty five lakhs from any bank or financial institution and does not have a turnover exceeding rupees five crores at any time during the financial year 3
Clauses removed in CARO 2016 Adequacy of procedures for physical verification on inventory and dealing with material discrepancies noted on physical verification and maintenance of Proper records of inventory Internal controls relating to purchase of inventory and fixed assets and sale of goods and services Amounts required to be transferred to Investor Education and Protection fund have been transferred with in the dues dates. Whether in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are not less than fifty per cent of its net worth and whether it has incurred cash losses in such financial year and in the immediately preceding financial year Guarantees for loans taken by others from banks and financial institutions 4
Whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof Coverage Pertains only to immovable properties in fixed assets and fixed assets held for sale Immovable properties land & building, both freehold and leasehold Title conveyance deed, registered sale deed, transfer deed, any other relevant document As at Balance Sheet date Examples of modifications Title deeds held for part of the land Title deeds in the process of being transferred in the name of the company Difference in area between title deeds and the fixed assets register Title deeds under legal dispute Where there is a merger Where there is exception, disclosure to be made covering: Particulars of land and building, including location, area Amount (carrying value on balance sheet date) Remarks details of the exception 5
In respect of loans, investments, guarantees, and security whether provisions of section 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide the details thereof. Coverage All loans, investments, guarantees, security covered under section 185 and 186 of the Companies Act, 2013. Examples of modifications: Loans given, guarantee given, security provided or acquisition of securities that exceed limits without prior approval by means of a special resolution Loan given at rate of interest lower than prescribed rates Where there is exception, disclosure to be made covering: Particulars (whether loan / investments / guarantee / security Relationship with party Amount (Rs) Remarks (state the details of the noncompliance) Points to consider Look at applicability of sections 185 and 186 and Rules thereunder, including identifying persons who are covered (source: MBP1, MBP2, section 189 register, agenda and minutes of various meetings of the Board and its committees etc.) Assess potential impact on audit opinion on financial statements. 6
Whether the company has defaulted in repayment of loans or borrowing to a financial institution, bank, Government or dues to debenture holders? If yes, the period and the amount of default to be reported (in case of defaults to banks, financial institutions, and Government, lender wise details to be provided). Dues to Government has been included. Further lender wise details have to be provided Coverage All types of loans and borrowings, including working capital loans, overdraft facilities etc. Repayment includes principal and interest. Reporting to be made for all defaults that exist on the balance sheet date, irrespective of when the defaults occurred. Government includes central, state governments in India and foreign governments. Government companies excluded. Lender wise information to be provided in case of defaults to banks, financial institutions and government. This requirement is not there for debenture holders (even if a bank, financial institution or government is a debenture holder). Where there is exception, disclosure to be made covering: Due to financial institutions, banks, government (lender wise). Due to debenture holders does not require lender wise information. Amount of default principal and interest Period of default 7
Whether managerial remuneration has been paid or provided in accordance with the requisite approvals mandated by the provisions of section 197 read with schedule V to the Companies Act? If not, state the amount involved and steps taken by the company for securing refund of the same. Coverage Compliance with Section 197 of the Companies Act, 1956 read with Schedule V of the Act as regards limits Not applicable for a private Limited Company Where there is exception, disclosure to be made covering: Payments made to Director/ whole time director/managing Director/ Manager Amounts paid/ provided in excess of limits prescribed Amount due for recovery as at Balance sheet date Steps taken to secure recovery of the amount, Remarks, if any 8
Whether the Nidhi Company has complied with the Net Owned Fund to Deposits in the ratio of 1: 20 to meet out the liability and whether the Nidhi Company is maintaining ten percent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability. Coverage: Compliance with condtions of net owned funds to deposit ratio and quantum of unencumbered term deposits. Definition of net owned finds Share capital, and free reserves as reduced by accumulated losses and intangible assets as at the last balance sheet date. Where there is a exception disclosure to be made covering In case of shortfall in the ratio of net owned funds to the deposits the amount of shortfall and actual ration of net owned funds to deposits in case of shortfall with regard to the minimum amount of 10% as unencumbered term deposits, as specified in Nidhi Rules 2014, report the amount thereof. 9
Whether all transactions with the related parties are in compliance with sections 177 and 188 of Companies Act, 2013 where applicable and the details have been disclosed in the Financial Statements etc., as required by the applicable accounting standards Coverage All transactions with related parties (sections 177 and 188) Compliance with these sections Disclosure in financial statements etc. per accounting standards Where there is exception, disclosure to be made covering: Nature of the related party relationship and the underlying transaction Amount involved Remarks (state the details of the noncompliance) Points to consider Identification of related parties completeness Reference may be to SA 550 Related parties for arm s length and ordinary course of business 10
Whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review and if so, as to whether the requirement of Section 42 of the Companies Act, 2013 have been complied with and the amount raised have been used for the purposes for which the funds were raised. If not, provide the details in respect of the amount involved and nature of noncompliance. Coverage This clause deals with compliance with section 42 of the act with respect to equity shares, preference shares and fully or partly convertible debentures Private placement excludes Qualified institutional Buyers and employees of the Company being offered ESOP s. Any offer or invitation not in compliance with provisions of section 42 of the act shall be treated as a public offer and the required provisions relating to public offer needs to be complied with. Funds are used for the purposes for which they were raised. Where there is exception, disclosure to be made covering: Type of security, amount involved and nature of non compliance which would also include (if applicable)the amounts utilized for any other purpose other than the started objective and unutilized balance as at the year end. 11
Whether the company has entered into any noncash transactions with directors or persons connected with him and if so, whether the provisions of section 192 of Companies Act, 2013 have been complied with. Coverage Relates to acquisition of assets For consideration other than cash By or to Director and person connected therewith Requires prior approval accorded by a resolution of the company in general meeting If the director or person connected there with is also a director of the holding company, a similar approval should also be obtained by the holding company through a resolution at its general meeting. Excludes transactions which happen during the year end for which corresponding settlement happens in the subsequent year Points to consider Identification of person connected with a director Determination of whether the transaction is a noncash transaction 12
Whether the company is required to be registered under section 45I of the Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained. Coverage and reporting Examine transactions of the company with relation to activities covered under RBI act and directions related to NBFC Examination of Financial statements to ascertain whether Company s financial assets constitute more than 50% of the assets and income from financial assets constitute more than 50% of the gross income Whether registration as required has been obtained and if not the reasons there of should be reported. 13
Thank you 14